Buying a new property is a time filled with excitement. But there’s one niggle lurking behind the walls of most landlords’ newly prized structures – stamp duty tax. The UK Government recently changed stamp duty tax thresholds. So, whether you’re buying your first property or already paying stamp duty on second homes, there are new tax thresholds to consider.
In this article, we are going to discuss :
What is Stamp Duty?
Stamp duty (or more specifically stamp duty land tax) is a tax you pay when buying a residential property or land over a specific value in the UK. The amount you pay will depend on when you purchased the property and how much you paid for it.
Why do we pay stamp duty?
The original goal of the stamp duty tax was to raise funds for the war against France in 1694. At this time, the tax applied to property transactions, other documents and even physical items such as hair powder and playing cards! Proof of payment was evidenced by a ‘stamp’. While the Crown introduced stamp duty as a temporary means to raise finances, it proved so successful at raising revenue that it endured well into today’s timeline.
Today, governments continue to impose stamp duties on documents related to real estate transactions, patents and copyrights. The stamp duty land tax (the tax paid when buying a property) acts as a revenue source to fund government programmes and activities.
What Are the 2022 Stamp Duty Changes?
From September 23rd 2022, stamp duty tax rates have changed for residential transactions.
To promote an economy based on high growth and low tax, the UK Government has cut stamp duty land tax in three ways:
1. Doubling the tax-free threshold from £125,000 to £250,000. This new policy means you will not have to pay stamp duty on the first £250,000 of your original property sale price.
2. Increasing the threshold at which first-time buyers commence stamp duty payments from £300,000 to £425,000.
3. Allowing first-time buyers to access the stamp duty relief when they purchase a property costing less than £625,000 (instead of the previous £500,000 threshold).
How Much is Stamp Duty on a Buy-To-Let?
We’ve created a simple table (below) to show how much stamp duty tax you must pay on first and second properties. Note: this table only applies to residential properties. If you’re purchasing an office building or commercial property, you will only pay up to 5% in stamp duty tax.
So, when buying a residential property after the 23rd of September 2022, here’s how much stamp duty you may have to pay:
|Second home or buy-to-let
|Up to £250,000
|£250,001 to £925,000
|£925,001 to £1.5 million
|Above £1.5 million
This buy to let stamp duty calculator tells you how much stamp duty you might pay on purchases of additional properties such as buy to lets and second homes.
How Can You Avoid Stamp Duty?
Now that you have an understanding of stamp duty tax and how much you could be liable to pay, let’s get to the good stuff – avoiding tax (legally of course!). There are various legal ways of avoiding stamp duty tax, from reducing stamp duty on second homes to the first-time buyer loophole. You could save thousands of pounds with knowledge of existing exceptions and legal reliefs. In fact, David Hannah of Cornerstone Tax estimates that there is an overpayment of stamp duty land tax at around 2 billion pounds a year!
1. Stamp duty land tax first-time buyer
The first-time buyer loophole is one of the most basic reliefs to stamp duty tax. If you’re a first-time buyer in the UK and the property is less than £425,000, you may not have to pay stamp duty tax. This relief could also be applicable in situations where a partner or friend you buy a property with is a first-time buyer (if the property is under their name). Tax is calculated on the title deeds not the mortgage payer, so there is scope to reach an agreement
2. Avoid stamp duty on second homes
If you’re considering purchasing a second home, there is usually an additional stamp duty tax charge that comes with it. This further payment can range from 3 to 15% depending on how much you pay for the property.
However, there are ways you can avoid stamp duty when buying a second home. The two main methods of avoidance are:
- a) Buy a property for £40,000 or less
- b) Buy an alternative home, such as a motorhome or houseboat
Unfortunately, these options provide most people with limited property options. So, some people might opt for the refund method instead.
3. HMRC stamp duty refund
You may be eligible to claim back a stamp duty refund with HMRC under a specific condition:
If you purchased a new main residence while still owning your first home, but then sold that first home within three years you may be eligible for a refund. The refund is the 3% surcharge (the amount above what would otherwise have been charged if the house was not an additional property).
Since stamp duty is a self-assessed tax, it is up to you to complete and submit an accurate assessment. If you have overpaid, you have one year to submit an amended stamp duty tax return. HMRC will require a comprehensive explanation of why the initial evaluation you submitted was incorrect.
4. Buy-to-let investment as first property purchase
If the buy-to-let investment is your first property purchase (in your name and not under a limited company or a limited liability partnership), you won’t have to pay any additional stamp duty surcharge because you only own one property. However, remember that you will not qualify for the full first-time buyer relief since it can only be used for houses you intend to inhabit.
If you’ve purchased a buy-to-let property, why not rent it out through Flex Living for a guaranteed rental income?
5. Transferring a property
If your home has been transferred to you mortgage-free, then you don’t have to pay stamp duty tax on the property’s market value. Transferal often happens when properties are gifted (from family members or even strangers!). However, if you take some responsibility for the gifted mortgage or give anything of monetary value in exchange, you will probably have to pay stamp duty.
You can also gift a portion of your property to reduce how much stamp duty you are liable to pay. For instance, if a family or friend sells you a property worth £300,000 and £50,000 of that if gifted to you, then the stamp duty payable would be on the value of £250,000 (which is 0% for first time buyers and 3% for buy-to-let). It’s worth noting that friends and family are defined loosely and do not have to be an immediate family member or bestfriend.
6. Pay separately for removable features/chattels
You only have to pay stamp duty on the property purchase itself, which means you do not have to pay tax on removable features. However, you can still pay for these items separately outside of the property purchase with a legal agreement that is stamp duty free.
Removable features include furnishings, fixtures or equipment that are not permanently fixed to the property’s walls, floors or ceilings and that you can safely remove without any damage. If the seller has agreed to leave you certain fixtures and fittings, then you can agree on a reasonable price and subtract it from the final purchase price when completing your stamp duty self-assessment.
For example, say you wanted to buy your first property for £251,000, and this price encompassed all removable fixtures with an estimated cost of £25,000. Stamp duty tax on the entire property including fixtures would be 3% (since it is over the £250,000 threshold). However, if you agree with the seller to pay for the removable fixtures separately, the property price falls to £226,000 and stamp duty tax is 0%.
You will likely need a separate legal agreement if you pay for removable features separately, and this should be discussed with your solicitors.
For an item to be considered a fixture or a part of the land, it must be annexed to the property. In these cases, you will have to pay stamp duty tax. If, however, the household items are removable and can be moved around, you can avoid paying stamp duty.
How do you know if a feature is subject to stamp duty? The best way to think about it is via the method of attachment. In other words, is the feature permanently appended to the walls, floors or ceilings using nails, cement or screws? Even if you can easily remove a feature, the way it’s attached to the property could make it a fixture subject to stamp duty – for instance, lighting fixtures and built-in cabinetry.
|Removable features (no stamp duty)
|Irremovable features (stamp duty)
|· Lighting fixtures
· Built-in surround sound wiring
· Built-in speakers into the wall
· Custom built-in cabinetry
· Floating laminate flooring
Note: The HMRC also has a list of items accepted as removable ‘chattels’ but recognises there would be additional items accepted on a case-by-case basis due to the continually evolving nature of this area of law.
7. Buying out your ex-partner
If you are married but going through a divorce (or in a civil partnership that you are ending and one partner wants to buy-out the other), then in most cases, you will not have to pay stamp duty. You are not liable to pay stamp duty when the property is sold or transferred to one partner as part of a court order or a formal agreement.
8. Mixed-use buildings: Look for trade or commercial elements
You may qualify for mixed-use relief if your residential property includes non-residential property. In these cases, stamp duty is payable at the lower commercial rate (maximum of 5%). Mixed-use buildings could have a residential element but are not exclusively residential. A property is considered ‘mixed-use’ even if the non-residential element is small. For example, mixed commercial and residential buildings include:
- A ‘shop with a top’
- A fast-food restaurant with flats above
- A large apartment building with commercial units on the bottom and above
Note: valuations of properties and whether they count as mixed-use can be assessed on a case-by-case basis.
9. Uninhabitable properties
The Housing Act 1957 and the Human Habitation Act 2018 broadened the conditions under which you can’t lawfully let a property to a human being (bathrooms, kitchens and toilets are required at a bare minimum). If the property is not suitable for use as a dwelling, then it may not be subject to the same stamp duty rates as a typical residential property.
10. Multiple dwellings relief
With multiple dwellings relief, you could save or get a refund of thousands of pounds from HMRC. Anybody who buys a property containing two or more dwellings (linked through a singular transaction) can access this relief. So, what counts as a ‘multiple dwellings’ property?
- Staff accommodation
- Basement flats
- Properties with offices
- A large property divided into several dwellings (e.g., apartments)
For example, if you buy a block of 10 apartments worth £2.5 million, each apartment could have an average valuation of £250,000 per apartment. Using the multiple dwellings relief, only 3% stamp duty would be payable per apartment.
Keep in mind there are some circumstances where you cannot claim the relief. For instance:
- If the dwelling has a higher threshold interest such as Annual Tax on Enveloped Dwellings
- If flat tenants exercise their collective rights to buy
- If charities relief is claimed
- If crofting community rights to buy are exercised
To see if your property qualifies for the relief, look at the building’s structures and assess whether these are capable of being seen as separate. Multiple dwellings relief is not awarded automatically; you must claim it when you submit your Land Transaction Tax return.
Calculating multiple dwellings relief can be confusing. In fact, a recent HMRC evaluation suggested that up to a third of claims submitted for ‘multiple dwellings relief’ refunds were incorrect. Accordingly, it is best to seek advice from a property tax advisor such as UK Landlord Tax or Gerald Edelman before submitting a claim.
11. Buying property already owned by a LTD company in the UK
Rising stamp duty land tax in recent years has incentivised more people to purchase the shares in a company (and underlying residential property asset) rather than the property itself. Since you would be buying the shares of a company rather than making a land transaction, in theory, you would not be liable to pay stamp duty land tax. However, you usually need to pay a 0.5% tax when buying shares, so you will still have to fork out a little bit of money.
12. Buying a property owned in a LLP
An LLP is a Limited Liability Partnership. This partnership can include a couple, two friends, or any other basic structure where more than one person helps to manage the property (this partnership does not need to be pre-registered with HMRC). Why is this advantageous from a tax perspective? Well, the property is held on trust in the LLP, meaning the property ownership can be transferred from one person to another (within the partnership) at an agreed price (e.g., the sale value of the property). The legal ownership remains unchanged, so there is no stamp duty to pay.
The lines on what can or cannot be considered an LLP are open to interpretation and may be more flexible than you think! A partnership may not necessarily be an obvious connection between two investors, so it’s best to seek advice from an accountant or tax expert who specialises in LLPs such as AccoTax or ABG. New members can be added to an LLP at any time (with agreement from all members). If you can prove that you are part of a limited liability partnership, then you can acquire property owned by that partnership without paying stamp duty.
See further resources and information sheets at the Institute of Chartered Accountants in England and Wales.
13. Relief for property traders: Probate purchases
When a property trader buys a dwelling from the personal representative of a deceased person, the purchase is immune from stamp duty land tax if three conditions are fulfilled:
- The purchase is completed in the course of business (that is, the property trader makes the transaction to buy dwellings from the personal representatives of the deceased person)
- The deceased individual inhabited the dwelling as their main residence in the two years prior to their death and;
- The land area obtained does not exceed 10,000 sqm
14. Buying where employees are relocating their employment
When an employer buys a dwelling from an individual or a group of individuals (who are employees), then the purchase is free from stamp duty tax if the following conditions are met:
- The individual/employee occupied the dwelling as their main residence at some point in the two years preceding the purchase date
- The purchase is made because the employee had to relocate for their job and change residence
- The purchase price is not higher than the dwelling’s market value and;
- The land area acquired by the employer does not exceed the permitted area.
Can I Pay Stamp Duty in Instalments?
Unfortunately, you cannot pay stamp duty tax in instalments. You have 14 days after completing the property purchase to file a return to HMRC and pay your stamp duty tax.
Be careful not to confuse stamp duty land tax with:
- Stamp duty on shares bought on a stock transfer form
- Stamp duty reserve tax on the paperless purchase of shares
- Land and buildings transaction tax for transactions in Scotland
The HMRC website has step-by-step instructions on how to pay stamp duty.
Risks of Stamp Duty Avoidance
As expected, there are some things to be cautious of when using tax loopholes. In recent years, stamp duty mitigation schemes have increased, leading to heightened scrutiny from HMRC.
If HMRC suspects you are avoiding stamp duty, they will most likely scrutinise your property transaction as well as your entire tax affairs. HMRC has the right to commence an investigation up to six years after your property purchase. If they decide within this time that you were liable to pay stamp duty, you may have to pay the full amount and a penalty of up to 100% of the tax owed (you would also be charged the interest that amassed from the purchase completion date).
By using a stamp duty mitigation scheme, you could find yourself stuck in costly litigation processes. Therefore, it is important to consult with tax specialists and make sure your actions are legal.